To start with I must admit that I am not a big fan of RONA. I know many of you out there including some clients that I have worked with are religious about RONA. Some like Rice and some like potatoes. It certainly has its attributes. It’s about value based management.
RONA stands for Return On Net Assets. This equals the Net Operating Profit after tax divided by the sum of cash and working capital requirements plus fixed assets.
It takes into consideration the assets a company uses to achieve its success.
RONA = Net Income divided by Fixed Assets + Net Working Capital
The higher the return, the better the profit performance for the company.
o It can maximize value creation
o Increases corporate transparency
o Aligns managers interest with share holder/owners interest
o Improve internal strategic communication
o Establishes clear priorities
o Streamlines budgeting
WHY I AM NOT A BIG FAN of RONA
Several things keep me from being a big fan of RONA.
1. It can create a negative incentive for individual managers to avoid investing in growth. This is especially true when their bonus or incentive is tied to RONA. Branch managers, middle managers and other managers may make decisions based on RONA that are not in the best interest of the company’s long term growth strategy. A manager could elect to make his personal bonus on the backs of his employees by running too lean. This could cause service problems, customer complaints and quality problems just to mention a few. There are other measurements that can be used just as effectively but I’ll leave that discussion up to you and your CFO.
2. It is an all embracing process that often requires a culture change. This almost always requires consulting assistance. (Good for our business)
3. It can seem complex to middle management. Actually for most of management that are not trained in finance.
4. Requires diligent, explicit CEO and Board support
5. Specific RONA value based management training is essential
By the way—- just for the record — the perfect value based management system has yet to be invented or discovered. All methodologies have their drawbacks.